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The War Puzzle: Contradictory Effects of International Conflicts on Stock MarketsAmelie BruneUniversity of Zurich - Department of Banking and Finance Thorsten HensUniversity of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute (Zurich Center) Marc Oliver RiegerUniversity of Trier Mei WangWHU - Otto Beisheim School of Management May 29, 2011 Swiss Finance Institute Research Paper No. 11-21 Abstract: We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. In cases when a war starts as a surprise, the outbreak of a war decreases stock prices. We show that this paradox cannot be explained by uncertainty about investment decisions, nor by the expectation about a quick end of the war or ambiguity aversion. A connection of this puzzling phenomenon to mean-variance preferences of investors is suggested.
Number of Pages in PDF File: 30 Keywords: International conflicts, war, stock market reaction, news analysis, behavioral finance JEL Classification: G11, G14, G19 working papers seriesDate posted: May 31, 2011Suggested CitationContact Information
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